Stephen L. Slavin Union County College Cranford, New Jersey The New School University New York City Mc Graw Hill Education
Contents in B 1 A Brief Economic History of the United States 1 2 Resource Utilization 25 3 The Mixed Economy 49 4 Supply and Demand 75 5 Demand, Supply, and Equilibrium 99 6 The Price Elasticities of Demand and Supply 131 7 Theory of Consumer Behavior 163 8 Cost 179 9 Profit, Loss, and Perfect Competition 211 10 Monopoly 247 11 Monopolistic Competition 275 12 Oligopoly 293 13 Corporate Mergers and Antitrust 321 14 Demand in the Factor Market 341 15 Labor Unions 359 16 Labor Markets and Wage Rates 381 17 Rent, Interest, and Profit 409 18 Income Distribution and Poverty 431 19 International Trade 465 20 International Finance 495 Glossary 519 Photo Credits 531 Index 532
Expanded Contents Preface xi w A Brief Economic History of the United States 1 Introduction 1 The American Economy in the 19th Century 2 Agricultural Development 2 The National Railroad Network 4 The Age of the Industrial Capitalist 5 The American Economy in the 20th Century 6 The Roaring Twenties 7 The 1930s: The Great Depression 7 The 1940s: World War II and Peacetime Prosperity 10 The 1950s: The Eisenhower Years 14 The Soaring Sixties: The Years of Kennedy and Johnson 14 The Sagging Seventies: The Stagflation Decade 15 The 1980s: The Age of Reagan 15 The State of American Agriculture 16 The "New Economy" of the Nineties 17 The Ominous 00s 18 Economics in Action: America's Place in History 19 2 Resource Utilization 25 Economics Defined 25 The Central Fact of Economics: Scarcity 26 Scarcity and the Need to Economize 26 The Economic Problem 26 The Four Economic Resources 26 Opportunity Cost 28 Full Employment and Full Production 29 The Production Possibilities Curve 32 Productive Efficiency 38 Economic Growth 38 Economics in Action: Will You Be Underemployed When You Graduate? 41 IP The Mixed Economy 49 The Three Questions of Economics 49 What Shall We Produce? 49 How Shall These Goods and Services Be Produced? 50 For Whom Shall the Goods and Services Be Produced? 50 To Sum Up 51 The Invisible Hand, the Price Mechanism, and Competition 51 The Invisible Hand 51 The Price Mechanism 52 Competition 52 Trust 53 Equity and Efficiency 53 The Circular Flow Model 54 The Economic Role of Government 55 Market Failure 56 Externalities 56 Curbing Environmental Pollution 58 Lack of Public Goods and Services 59 Government Failure 60 Capital 62 The "Isms": Capitalism, Communism, Fascism, and Socialism 64 The Decline and Fall of the Communist System 67 Transformation in China 67 Last Word: The End of the Isms? 68 Economics in Action 1: The Bridge to Nowhere 69 Economics in Action 2: The Internal Revenue Code 69 XXV
xxvi Expanded Contents 4 Supply and Demand 75 Demand 75 Supply 76 Equilibrium 78 Surpluses and Shortages 78 Shifts in Demand and Supply 79 Price Ceilings and Price Floors 83 Applications of Supply and Demand 88 Interest Rate Determination 88 College Parking 89 The Rationing Function of the Price System 90 Last Word 91 Economics in Action: High Gas Prices Something Only an Economist Could Love 91 5 Demand, Supply, and Equilibrium 99 Demand Defined 99 Individual Demand and Market Demand 100 Changes in Demand 101 Increases in Demand 102 Decreases in Demand 102 Changes in Quantity Demanded and Changes in Demand 103 Practice Problems 104 What Causes Changes in Demand? 104 Supply Defined 108 Individual Supply and Market Supply 109 Changes in Supply 110 Practice Problems 110 What Causes Changes in Supply? 111 Graphing the Demand and Supply Curves 113 Graphing the Demand Curve 113 Graphing the Supply Curve 114 6 The Price Elasticities of Demand and Supply 131 The Elasticity of Demand 131 The Price Elasticity of Demand 132 Measuring Elasticity 132 The Meaning of Elasticity 133 Determinants of the Degree of Elasticity of Demand 139 Advertising 141 Elasticity and Total Revenue 143 Elastic Demand and Total Revenue 143 Inelastic Demand and Total Revenue 144 Income Elasticity of Demand 144 Cross Elasticity of Demand 146 Price Elasticity of Supply 147 Elasticity over Time 148 Tax Incidence 150 Economics in Action: The Price Elasticity of Demand for Oil 153 7 Theory of Consumer Behavior 163 Utility 164 What Is Utility? 164 Marginal Utility 164 Total Utility 165 Maximizing Utility 165 The Water-Diamond Paradox 167 Some Limitations of Utility Applications 168 Consumer Surplus 168 Do Price Gougers Rip Us Off? 172 Economics in Action: All-You-Can-Eat Buffets 173 The Equilibrium Point 115 Shifts in Demand and Supply 118 Economics in Action: Why Can't I Sell My House? 119
Expanded Contents xxvii Cost 179 Costs 179 Fixed Costs 180 Variable Costs 180 Total Cost 180 Marginal Cost 180 The Short Run and the Long Run 183 The Short Run 183 The Long Run 183 Average Cost 183 Average Fixed Cost 184 Average Variable Cost 184 Average Total Cost 184 Graphing the AFC, AVC, ATC, and MC Curves 186 Why Are the AVC and ATC Curves U-Shaped? 190 The Production Function and the Law of Diminishing Returns 191 Economies of Scale 193 Diseconomies of Scale 194 A Summing Up 196 The Decision to Operate or Shut Down 196 The Decision to Go Out of Business or Stay in Business 198 Choosing Plant Size 200 The Long-Run Average Total Cost Curve 202 Economics in Action: Wedding Hall or City Hall? 203 9 Profit, Loss, and Perfect Competition 211 Part I: Profit and Loss 211 Total Revenue and Marginal Revenue 212 Graphing Demand and Marginal Revenue 212 Economic and Accounting Profit 213 Profit Maximization and Loss Minimization 213 A Summing Up 220 Efficiency 222 Review of Efficiency and Profit Maximization 222 Part II: Perfect Competition 223 Definition of Perfect Competition 223 The Perfect Competitor's Demand Curve 226 The Short Run 227 The Long Run 231 Third Method of Calculating Profit and Loss 233 The Perfect Competitor: A Price Taker, Not a Price Maker 235 Efficiency, Price, and Profit 236 Economics in Action: The Internet Effect: A More Perfect Knowledge and Lower Prices 236 10 Monopoly 247 Monopoly Defined 247 The Graph of the Monopolist 248 Calculating the Monopolist's Profit 250 Review of the Monopolist's Economic Analysis 251 The Monopolist Losing Money 253 Alternative Method of Calculating the Monopolist's Profit or Loss 254 The Monopolist in the Short Run and in the Long Run 255 Are All Monopolies Big Companies? 255 Barriers to Entry 256 Limits to Monopoly Power 260 Economies of Scale and Natural Monopoly 260 What Is Natural Monopoly? 260 Two Policy Alternatives 262 Is Bigness Good or Bad? 263 When Is Bigness Bad? 263 When Is Bigness Good? 265 The Economic Case against Bigness 265 Conclusion 265 Last Word 266 Economics in Action: Would You Allow Walmart to Open a Supercenter in Your Community? 266
xxviii Expanded Contents 11 Monopolistic Competition 275 Monopolistic Competition Defined 275 The Monopolistic Competitor in the Short Run 276 The Monopolistic Competitor in the Long Run 278 Product Differentiation 279 Advertising and Monopolistic Competition 280 The Typical Monopolistic Competitor 281 Price Discrimination 282 Is the Monopolistic Competitor Inefficient? 286 Economics in Action: Selling Status 288 12 Oligopoly 293 Oligopoly Defined 293 Two Measures of the Degree of Oligopolization 294 Concentration Ratios 295 The Herfindahl-Hirschman Index (HHI) 295 The Competitive Spectrum 297 Cartels 297 Open Collusion 299 Covert Collusion 300 Price Leadership 301 Cutthroat Competition 302 Game Theory 305 Conclusion 306 Economics in Action: Cutthroat Competition in the College Textbook Market 306 Appendix: The Four Types of Competition: A Review 315 Perfect Competition 315 Monopoly 316 Monopolistic Competition 316 Oligopoly 316 Perfect Competition versus Imperfect Competition 316 Summary Tables 317 13 Corporate Mergers and Antitrust 321 A Historical Perspective on Corporate Concentration 321 Antitrust 322 The Political Background 322 The Sherman Antitrust Act 322 The Clayton Antitrust Act 324 The Federal Trade Commission Act (1914) 324 Modern Antitrust 325 Partial Breakdown of the Rule of Reason 325 The 60 Percent Rule 326 Two Landmark Cases 326 European Antitrust 327 Types of Mergers 328 Horizontal Mergers 328 Vertical Mergers 328 Conglomerate Mergers 329 Deregulation 330 Corporate Misconduct 331 How Effective Is Antitrust? 331 The Trend toward Bigness 331 Economics in Action: Pharmaceutical Fraud 334 14 Demand in the Factor Market 341 Derived Demand 341 Productivity 342 Prices of Substitute Resources 342 Marginal Revenue Product (MRP) 343 The MRP of the Perfect Competitor 344 The MRP of the Imperfect Competitor 347 Changes in Resource Demand 349 Changes in Resource Demand versus Changes in Quantity of Resource Demanded 349 The Four Reasons for Changes in Resource Demand 349 Optimum Resource Mix for the Firm 351 Economics in Action: Washing Machines and Women's Liberation 353
Expanded Contents xxix '15 Labor Unions 359 A Short History of the American Labor Movement 359 The Early Years 359 Key Labor Legislation 360 Craft Unions versus Industrial Unions 362 Union Organizing since the 1950s 364 The Formation of Change to Win 366 Jobs: Exportable and Nonexportable 367 The Economic Power of Labor Unions 367 The Economic Power of Large Employers 368 Collective Bargaining 370 Strikes, Lockouts, and Givebacks 370 The Collective Bargaining Agreement 372 The Strike 373 Averting Strikes: Mediation and Arbitration 374 Will You Ever Be a Member of a Labor Union? 374 Economics in Action: The Card Check Law 375 4Í7 Rent, Interest, and Profit 409 Rent 409 What Is Land? 409 How Is Rent Determined? 411 Economic Rent 412 Are Prices High because Rents Are High, or Are Rents High because Prices Are High? 413 Interest 414 What Is Capital? 414 How Is the Interest Rate Determined? 414 Interest Rates and Consumer Loans 415 The Present Value of Future Income 417 Profits 420 How Are Profits Determined? 420 How Large Are Profits? 420 Theories of Profit 422 Conclusion 424 Economics in Action: Subprime, Fringe, and Payday Lending 425 16 Labor Markets and Wage Rates 381 The Supply of Labor 382 Noncompeting Groups 382 The Theory of the Dual Labor Market 382 The Backward-Bending Individual Labor Supply Curve 383 The Market Supply of Labor 385 The Demand for Labor 386 The Marginal Revenue Product Schedule 386 Nonhomogeneous Jobs and Compensating Pay Differentials 387 Determination of the Wage Rate: Supply and Demand 388 High Wage Rates and Economic Rent 390 Real Wages versus Money Wages 391 The Minimum Wage and the Living Wage 396 The Minimum Wage Rate: 1938 to the Present 396 Should There Be a Minimum Wage Rate? 397 The Living Wage 399 The Effects of Employment Discrimination on Wages 400 Employment Discrimination against Women 400 Employment Discrimination against African Americans 403 Conclusion 403 Economics in Action: The Education Gap 403 18 Income Distribution and Poverty 431 Income Distribution in the United States 432 The Poor, the Middle Class, and the Rich 432 Distribution of Wealth in the United States 436 Distribution of Income: Equity and Efficiency 437 What Determines Income Distribution? 438 Poverty in America 439 Poverty Defined 439 Who Are the Poor? 442 Where the Poor Live 443 Child Poverty 443 The Main Government Transfer Programs 445 Theories of the Causes of Poverty 448 The Conservative View versus the Liberal View 450 Solutions 452 Economics in Action 1: Will You Ever Be Poor? 456 Economics in Action 2: The 1 Percent and the 99 Percent 457
xxx Expanded Contents 19 International Trade 465 Part I: A Brief History of U.S. Trade 466 U.S. Trade before 1975 466 U.S. Trade since 1975 466 The Effect of the Great Recession on Our Balance of Trade 467 U.S. Government Trade Policy 468 Part II: The Theory of International Trade 469 Specialization and Trade 469 Absolute Advantage 470 Comparative Advantage 470 Absolute Advantage versus Comparative Advantage 472 The Arguments for Protection 474 Tariffs or Quotas 477 Conclusion 479 Part III: The Practice of International Trade 480 What Are the Causes of Our Trade Imbalance? 480 Part IV: Our Trade Deficit with Japan and China 483 Japanese Trading Practices 484 Our Trade Deficit with China 484 Trading with China and Japan: More Differences than Similarities 485 Final Word 486 Free Trade in Word and Deed 486 Reducing Our Trade Deficit 487 Economics in Action 1: Buy American? 488 Economics in Action 2: Globalization 488 20 International Finance 495 The Mechanics of International Finance 495 Financing International Trade 495 The Balance of Payments 496 Exchange Rate Systems 499 The Gold Standard 499 The Gold Exchange Standard, 1944-73 500 The Freely Floating Exchange Rate System, 1973 to the Present 501 How Well Do Freely Floating (Flexible) Exchange Rates Work? 505 The Euro 505 The Yen and the Yuan 505 The Falling Dollar and the U.S. Trade Deficit 506 Running Up a Tab in the Global Economy 509 From Largest Creditor to Largest Debtor 509 Living beyond Our Means 511 A Codependent Relationship 511 Why We Need to Worry about the Current Account Deficit 512 Editorial: American Exceptionality 512 Glossary 519 Photo Credits 531 Index 532